Heightened Scrutiny Won’t Slow IRA Rollovers

Total individual retirement account (IRA) assets are
expected to reach $11.7 trillion by 2020, according to a report from Cerulli
Associates, despite the prospect for heightened scrutiny from multiple
regulators.

Shaan Duggal, research analyst with Cerulli, says the firm
expects the pace of IRA asset growth to remain steady through the end of the
decade. “Even with heightened FINRA rollover scrutiny, individuals, especially
Baby Boomers, will continue to roll over their defined contribution (DC)
assets,” Duggal notes.

Cerulli says there may also be pressure applied to rollover
providers coming out of fiduciary rulemaking efforts at the Department of Labor (DOL) and the Securities and Exchange Commission (SEC). Along with FINRA, the regulators are concerned
about potential conflicts of interest impacting service providers in the IRA
market.

Duggal notes that an important question will be how ongoing
rulemaking impacts account consolidation decisions. Many of the Baby Boomers
hitting retirement have multiple DC accounts, and are facing the challenging prospect
of building a sustainable retirement income stream. Cerulli recommends
plan advisers and recordkeepers use “the many DC participant data points they
have on file” to send targeted communications to build stronger relationships
with participants. This will lead to more knowledge and confidence in the IRA
rollover and/or account consolidation process.

“Creating a positive relationship early and building on it
as the individual progresses towards retirement is the ideal situation for many
providers,” Duggal continues. “Personalized communication during opportune
life moments will help ensure customer loyalty when an individual eventually
decides to roll over their account.”

This approach could become even more important in the years
ahead should fiduciary rules be strengthened to include more types of rollover
and investment recommendations. Especially with the DOL’s fiduciary reform, many
anticipate providers will be less able to offer non-fiduciary guidance to participants
contemplating a rollover.

NEXT: Leakage
and rollovers

Cerulli finds a greater number of Millennials are
contributing to Roth 401(k)s, “which will become a sizable rollover opportunity
in time.”

At the same time, cash-outs and loan defaults were
responsible for $81 billion in lost retirement assets in 2014. “With better,
retirement-related options available for participants who take these actions,
recordkeepers should continue focusing on limiting these outflows,” Cerulli
urges. “Participants over age 50 represented almost 80% of assets that rolled
over in 2014, reaffirming the importance of winning assets from these
investors.”

Like other research groups, Cerulli finds interest is
building around the idea of auto-portability.

“The current retirement income marketplace consists of
fragmented solutions,” the report explains. “Therefore, firms should understand
that income replacement is a process and that a singular product should work
alongside other products and solutions to create the best outcome.”

Not surprisingly, Cerulli says flexibility is important for
retirement income solutions.

“At both the retirement plan level and the product level,
providing flexibility allows investors to better deal with unexpected expenses
that may arise as they get older,” the report finds.

Another hurdle to greater rollover activity is that savers
are still interested in overall performance metrics and account balances, Cerulli
says, “significantly more so than any projections of retirement income.”

“Until this mindset changes, many participants will continue
to mismanage their defined contribution accounts,” the report concludes.

NEXT: Sizing the
opportunity

Cerulli’s report finds advisers received the majority of
rollover assets last year, followed closely by self-directed IRAs. Plan-to-plan
rollovers were a distant third.

According to Cerulli, the DOL’s fiduciary rule may start to
quell long-term outflows from DC plans, “especially since the DOL viewpoint is that the DC
plan is often the best place to leave assets.” However, Cerulli feels that, until
in-plan retirement income options become more widespread, retiring participants will still
opt to roll over their accounts to an IRA.

Concluding the report, Cerulli finds a majority of firms surveyed
recently have either launched a retirement income product or are enhancing an
existing product.

“Firms focusing on retirement income solutions are
concentrating their efforts on creating new products, such as annuities or
mutual funds, as well as creating new, more intuitive retirement income tools,”
Cerulli says.